Chapter 18, Problem 3DQ

To determine

If there is any difference between, prohibiting entry by a group of firms and levying a special tax on those new entrants.

Concept introduction:

Competition in a market:

It is a way by which the existing firm in the market tries to have dominance in the market with a larger market share. The way of dominance depends on the quality, restrictive laws, and the price of goods provided to the consumers.

Explanation:

Yes, there exists a major difference between, prohibiting entry by a group of firms and levying a special tax on those new entrants.

When a group of firms starts colluding with each other to restrict the entry of new firms in the market then the new entrants as well as the consumers are at loss. Due to a decrease in supply, the price of goods increases, and the consumers are left with few choices.

Levying special taxes on new firms help the government to increase its total revenue collected from tax. It also helps consumers as the prices are low and they have large number of alternatives. However, the firm can increase the goods price to compensate the tax rise.

But due to increase in the number of firms in the market, the competition in the market increases making the price to decrease. The increase in the tax revenue collected by the government can increase its welfare expenditure, thereby increasing the social welfare.